Fed Approves Higher Bank Capital Standards

MARTIN CRUTSINGER | AP Economics Writer

WASHINGTON (AP) – The Federal Reserve approved higher requirements for the amount of capital reserves banks must hold to cushion against unexpected losses. The change is aimed at preventing a repeat of the 2008 financial crisis.

The Fed voted 7-0 on Tuesday to approve the 792-page rule. The changes were mandated by the 2010 financial overhaul law and an international agreement.

The rule must also be approved by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Those agencies were expected to act as soon as next week.

Banks had lobbied to modify the requirements on higher capital, saying they could hamper their ability to lend. But experts said most big banks have already increased their capital reserves.

"With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy," said Fed Chairman Ben Bernanke.

Critics say the rule failed to go far enough and kept taxpayers are risk of having to bail out banks again, should they suffer the kinds of losses incurred during the crisis.

"The rule announced by the Federal Reserve today fails to learn the lesson of the most recent crisis and makes the next crisis – and more bailouts – more likely," said Dennis Kelleher, president of Better Markets Inc., a nonprofit bank watchdog group.

Under the rule, all banks will need to maintain a level of high-quality capital equal to 4.5 percent of their loans and other assets, weighted by how risky those assets are.

A Fed staff memo said that all bank holding companies with more than $10 billion in assets and more than 95 percent of bank holding companies with less than $10 billion in assets would meet the 4.5 percent capital requirement. There is currently a 4 percent requirement for capital but it is not restricted to just high-quality capital, such as bank stock or retained earnings.

The nation's 19 largest banks with assets of $250 billion or more will have to start meeting the requirements by Jan. 1. All other banks will have to begin meeting the requirements a year later. The rules will be fully phased in by the end of 2018.

The final rule dropped a provision from an earlier draft that required banks to hold higher amounts of capital for mortgage loans judged to be risky. The change was made after the housing industry and smaller community banks argued against this rule. They objected because they said it would restrict mortgage loans at a time when the housing industry was still struggling to recover.

"The smaller banks did ok and the mortgage lobby had its voice heard," said Alok Sinha, the head of the banking and securities team at accounting firm Deloitte & Touche.

Fed officials also signaled Tuesday that they are considering moving forward on even tougher standards for the nation's largest banks.

Fed board member Daniel K. Tarullo said during the discussion that "we have a number of capital-related initiatives remaining."

He said there were four rules being considered that would increase capital requirements for eight big banking organizations that have been identified as having global systemic importance. This group includes Goldman Sachs Group Inc., Bank of America Corp., JPMorgan Chase and Co. and Citigroup Inc.

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